The Complete Guide to Leasing the Perfect Location

In many ways your location is your business. Your shop, its accessibility, parking, and appearance constitute much of what your customers perceive as your business. Finding the perfect location and negotiating a favorable lease can send a business out of the starting blocks with a bang.

If your building is poorly maintained or the neighboring stores are rundown, it reflects upon you, creating an impression that is difficult to overcome, regardless of the quality of your products and service. If your current lease is about to expire, it's a good time to evaluate not only your location, but also the terms of your obligation. Although moving is a big undertaking, it might be worth the cost, time, and effort.

Choosing the right location is simply a process of comparing the positives and negatives of each site, relative to the specifics of your business. The next step, negotiating a lease, involves knowing your immediate needs, financial threshold, and long-range goals.

Site Selection

If your sales are predominately retail (i.e. cash-and-carry and walk-ins), you will want a site that offers significant parking and visibility along a major traffic center. If the majority of your business is generated by referral or networking (i.e. weddings and parties), you may be able to compromise on these features.

Most retail locations are in multiple-tenant buildings, either strip shopping centers or large malls. Prime malls or shopping centers have "anchor" stores that guarantee to bring in shoppers. The neighboring stores in these types of properties help attract shoppers to the site or, if they are run-down and offer substandard merchandise, drive them away.

Regardless of the type of building you select, pay particular attention to details affecting the convenience of your customers. The site should have sufficient parking, even during busy times. Above all, make sure that any site you're considering has good exposure to a busy street. The ingress and egress should be easy for drivers to negotiate.

To maximize the benefit of traffic other businesses can generate, look for a location where the adjacent stores serve a clientele similar to your own. If all of the nearby businesses are newly opened, you won't benefit from the customers flocking to a retail outlet that already has a foothold in the market.

On the other hand, surrounding businesses that are extremely popular could result in too much traffic, especially if you share a parking lot. For instance, if one of your neighbors in a strip shopping center happens to be a trendy restaurant, your customers will be inconvenienced by not being able to find a parking place during the lunch period (11:30 a.m. until 1:30 p.m.). You could ask the landlord to reserve two or three parking spaces in front of your shop for your customers only, but such a provision should be spelled out in the lease. Even this compromise isn't a perfect solution.

An area that seems rundown, dated, or has some junky stores won't attract new, younger shoppers, but if you're depending on regulars, this might not be an issue. Otherwise, it's important to consider. Before rejecting the site, consult with the landlord to see if any changes are underway. It could be that the troublesome tenants are on their way out.

The single tenant, stand-alone building is another option, although this type of location might mean higher rental and operating costs. Stand-alone structures will afford more control over the building's appearance, but you will sacrifice the traffic generated by neighboring retailers. A single tenant site is a good choice for larger shops or for a florist looking to relocate to a bigger building.

Rent and Lease

Rent is generally calculated on a square footage basis, so you need to seriously think about how much space you need for your shop.

Determine the square footage and keep this figure in mind during your search. The options for dividing retail space vary considerably with each property and the ability to lease the size you need is a key consideration. This can have a significant effect on the bottom line, even when the size difference does not seem extraordinary.

Consider, for example, renting a 1,600-square-foot space instead of a 1,200-square-foot target size. At a rental rate of $20 per square foot the larger space translates to an additional $8,000 annually, not including higher utilities, cleaning service fees, and other expenses. If the extra space doesn't produce more revenue, you'll be drifting backward.

When considering a larger space, evaluate whether you can use the extra square footage to increase sales by adding inventory. Think in terms of specifics - gifts, vases, balloons - not in general terms, and use conservative estimates of sales.

Securing a favorable lease goes beyond monthly costs. A good lease eliminates unpleasant surprises and gives your business security and longevity.

Your location can figure into the rental. A site located in a busy mall will cost considerably more than one in an older part of town where traffic is moderate. Consider the money that won't have to be spent on advertising and marketing if you choose the mall space with its high exposure.

Rent for the building next door to the busiest bakery in the city might be more than you had wanted to spend, but if you figure in the money you'll make in cross promotion, you'll probably come out ahead.

Maintenance Costs

The rent is usually not the only major expense you incur when leasing space. Pay particular attention to terms regarding maintenance. Lease terms can vary from full service, where the landlord pays the utilities, insurance, maintenance, and other such expenses, to triple net ("NNN") arrangements, where the tenant is responsible for all costs of running the building, including the insurance and property taxes.

Many of these items involve considerable expense, so make sure that you completely understand your responsibilities and those of the landlord, including all maintenance issues. For example, who is responsible for landscaping, snow removal, or a leaking roof? Know your responsibilities and how much they will cost you before signing any lease.

Site Improvements

Leasehold improvements are another possible area of considerable expense. Unlike the standard practice in the office market, it's not customary to provide any allowance (or "work letter") to a retail tenant, so you will probably bear the entire cost of converting the site to fit your needs.

These expenses are highly variable and depend primarily upon the current condition of the property and the specifications for your store. Improvement costs (not including specialized equipment) can range from several thousand dollars for a minor refit to into the tens of thousands if major work is required, so this is a serious issue to consider when inspecting potential sites.

A new strip center may provide little more than an open bay prior to your improvements, while an older building may have a pre-existing layout requiring little or massive modification. If you have any doubts about these costs, don't hesitate to consult an architect, contractor, or building inspector before signing the lease.

Terms and Renewal

Because your storefront represents a considerable investment in time and money and is one of the primary assets of your business, you should insure that your investment is protected over time. Retail leases are typically three to five years in term and often provide the tenant with one or more options to extend. While the lease term itself represents a two-sided obligation, the options bind the landlord only and can be extremely beneficial to the tenant. You should ask for lease extension options equal to at least the original term and preferably twice that duration. This insures that your business is undisturbed for an extended period of time while allowing you the choice of relocating after three to five years if the site has been a disappointment or if your business has outgrown the space.

Leases typically include escalation clauses; provisions for the rent to increase at some preset rate, most often based on the Consumer Price Index (CPI). The increases may be annual events or they may apply only at the time an extension option is exercised. It is obviously preferable to secure a lease with a fixed rent for the initial term, but be prepared for a large increase upon exercising an extension (even a 3.5 percent annual inflation rate compounds to almost 19 percent after five years).

Credit Issues

Most landlords will want references or financial information on you and your business before entering into a long-term commitment with you. You may be required to personally guarantee the lease obligation, particularly if you are starting a new business or have a short track record. Don't take this personally, but seriously consider whether you are willing to take this added level of risk. A personal guarantee puts all of your assets potentially at risk if you are unable to make the lease payments. There are no firm standards in this area. One landlord may require a personal guarantee while another may not even ask for references or a credit check.

Extra Details

Some of the details to investigate when evaluating sites are:

• Acceptable facilities for unloading merchandise
• Signage restrictions
• Integrity of the electrical capacity, plumbing, and structure
• Handicapped patron accommodations
• Adequate lighting, both inside and out
• Plenty of space for a refrigeration unit
• Ample window display area
• Current pest inspection certification (especially for termites)
• Proof of the absence of asbestos or lead-based paint anywhere on the site.

Ultimately, a successful leasing experience is based on planning and anticipating. Securing a good location on reasonable terms is perhaps the single best thing you can do to help make your shop a success.